How Much Does China Really Affect the U.S. Economy?

China's Economic Facts and Influence

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A teller counts Chinese Yuan banknotes at a bank in Shanghai, China, on February 1, 2008. The Chinese Yuan is known locally as the RMB, or renminbi, which means 'the money of the people'.. Photo by Lucas Schifres/Pictobank/Getty Images

China's economy produced $19.5 trillion in 2015 (based on purchasing power parity). It's the world's largest economy. The European Union is second, at $19.1 trillion. The United States fell to third place, producing $17.9 trillion.

China has 1.37 billion people, more than any other country in the world. China is still a relatively poor country in terms of its standard of living. Its economy only produces $14,300 per person, compared to U.S.

GDP per capita of $56,300. The low standard of living allows companies in China to pay its workers less than in the United States. That makes products cheaper, which lures overseas manufacturers to outsource jobs to China. (Source: CIA World Factbook, China Economy.)

Components of China's Economy 

China built its economic growth on low-cost exports of machinery and equipment. Massive government spending went into state-owned companies to fuel those exports. These companies dominate their industries. This includes the big three energy companies, PetroChina (CNPC), Sinopec, and CNOOC.  They are less profitable than private firms, returning only 4.9% on assets compared to 13.2% for private companies.

China developed the cities to attract workers for these factories. As a result, one-fourth of China's economy is in real estate. The government also funded construction of railways and other infrastructure to support growth.

As a result, it imported massive amounts of commodities, like aluminum and copper. 

By 2013, the 10% annual growth it produced threatened to become a bubble.  That's when China looked toward economic reform.

China's Exports

China has been the world's largest exporter since 2013. It exported $2.7 trillion of its production in 2015.

The EU exported $2.25 trillion, and the United States, just $1.6 trillion. 

China shipped 16.9% of its exports to the United States in 2014. That contributed to a $365 billion trade deficit in 2015. China is increasing its trade with Hong Kong (15.5%),  Japan (6.4%) and South Korea (4.3%) It's encouraging trade with African nations, investing in their infrastructure in return for oil. Finally, China is increasing trade agreements with other Southeast Asian nations, and with many Latin American countries.

China does a lot of manufacturing for foreign businesses, including U.S. companies. The raw materials are shipped to China, where factory workers build the final products and ship them back to the U.S. In this way, a lot of China's so-called "exports" are really for American companies.

China primarily exports electrical and other types of machinery, especially computers and data processing equipment, as well as optical and medical equipment. It also exports apparel, fabric and textiles. It's the world's largest exporter of steel.

 

China Imports

China is the world's third largest importer. In 2015, it imported $1.6 trillion. The United States imported $2.4 trillion. China imports raw commodities from Latin America and Africa, such as oil and other fuels, metal ores, plastics and organic chemicals. It's the world's largest importer of aluminum and copper. 

China's Share of World Commodity Consumption in 2014/2015

Commodity Share of World Consumption
Aluminum 54%
Nickel 50%
Copper 48%
Zinc, Tin 46% of each
Steel 45%
Lead 40%
Cotton 31%
Rice 30%
Gold 23%
Corn 22%
Wheat 17%
Oil 12%

That's fueled a world-wide boom in mining and agriculture. Unfortunately, suppliers over-produced, creating too much supply. As a result, prices cratered in 2015. As China's growth slows, prices for commodities used in manufacturing, such as metals, will drop. (Source: "China's Giant Appetite," WSJ, August 26, 2015)

Why China's Growth Is Slowing

China's economic growth rate slowed to 6.8% in 2015, the lowest since 2009. It grew 7.3% in 2014, 7.7% in 2013, 7.8% in 2012, and 9.3% in 2011.  Before that, China enjoyed 30 years of double-digit growth. Unfortunately, that was fed by government stimulus spending, business investment in capital goods, low-interest rates, and state protection of strategic industries such as banking. This success led to 5.5% inflation in 2011, a real estate asset bubble, growth in public debt, and severe pollution.(Source: "China, Fed Policy Weigh on Investors," WSJ, January 19, 2016.)

The government's emphasis on job creation and business development based on exports left little for social welfare programs. That forced the Chinese population to save for their retirement, strangling domestic demand. Most of the growth has occurred in the cities along China's east coast, attracting 250 million migrant workers to these urban areas.

Chinese leaders must continue to stimulate growth and create jobs for all these workers, or face unrest. They remember all too well Mao's Revolution. However, at the same time, they must provide more social services, allowing workers to save less and spend more. Only an increase in domestic demand will enable China to become less reliant on exports.

In addition, leaders must crack down on local corruption, and find ways to improve the environmental impact of industrialization. For example, leaders have embarked on an ambitious nuclear and alternative energy program to reduce reliance on dirty coal and imported oil. Here's more about China's Economic Reform.

How China Affects the U.S. Economy

China is the one of the largest foreign holders of U.S. Treasury bills, bonds, and notes. As of December 2015, China owned $1.246 trillion in Treasuries. That's about one-fifth of the public debt held by foreign countries. For more, see What Is the U.S. Debt to China? (Source: U.S. Treasury, Major Foreign Holders

China buys U.S. debt to support the value of the dollar. China pegs its currency (the yuan) to the U.S. dollar. It devalues the currency when needed to keep its export prices competitive. 

China's role as America's largest banker gives it leverage. For example, China threatens to sell part of its holdings whenever the U.S. pressures it to raise the yuan's value. Since 2005, China raised the yuan's value by 33% against the dollar. Between 2014 and 2015, the dollar's strength increased by 25%. China allowed the value of the yuan to decline so its exports could remain competitive with Asian countries that hadn't tied their currency to the dollar. For more, see Dollar to Yuan Conversion.

How China Avoided the Recession

During the financial crisis of 2008, China pledged 4 trillion yuan, about $580 billion, to stimulate its economy to avoid the recession. The funds represented 20% of China's annual economic output. It went towards low-rent housing, infrastructure in rural areas and construction of roads, railways, and airports. China also increased tax deductions for machinery, saving businesses 120 billion yuan. China raised both subsidies and grain prices for farmers, as well as allowances for low-income urbanites.

It eliminated loan quotas for banks to increase small business lending. However, now China's companies are struggling to repay that debt. Combined private/public debt is two and a half times greater than GDP.  (Source: "Taking a Tumble," The Economist, August 29, 2015)

China also took a leadership role by dropping interest rates three times in two months.  (Source: "China Unveils 4 Trillion Yuan Spending as World Faces Recession," Bloomberg, November 10, 2008) 

Does China Engage in Unfair Trade Practices?

In the 2016 Presidential campaign, Republican candidate Donald Trump accused China of unfair trade practices. He threatened to slap a 30% tariff on all Chinese imports. China's unfair trade practices was also a hot topic during the 2012 Presidential debate. During that debate, President Obama recounted how the U.S. Department of Commerce successfully brought many disputes to the World Trade Organization, over unfair practices involving tires, steel, and other materials.

In 2007, the Commerce Department threatened to apply penalty tariffs to Chinese products. For example, it accused China of "dumping" its paper exports into the United States. The Commerce Department claimed that China unfairly provided subsidies of 10-20% to its manufacturers of glossy paper used in books and magazines. Trade volume had grown 177% in one year. The U.S.-based New Page Corporation brought the anti-dumping case to the Commerce Department, saying it could not compete against subsidized prices.

China Is the Reason Hank Paulson Became Treasury Secretary

Former U.S. Treasury Secretary Henry Paulson was hired in 2006 to lower the trade deficit with China. He initiated the “Strategic Economic Dialogue” to open China's market, especially its banking industry. He did meet with several successes, including:

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